Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.

Consolidated Statements of Income
Years ended December 31 ($ millions)	2010	2009	2008
Net sales	$26,662	$23,123	$25,269
Operating expenses
Cost of sales	13,831	12,109	13,379
Selling, general and administrative expenses	5,479	4,907	5,245
Research, development and related expenses	1,434	1,293	1,404
Loss/(gain) from sale of business	--	--	23
Total operating expenses	20,744	18,309	20,051
Operating income	5,918	4,814	5,218
Interest expenses and income
Interest expense	201	219	215
Interest income	(38)	(37)	(105)
Total interest expense	163	182	110
Income before income taxes	5,755	4,632	5,108
Provision for income taxes	1,592	1,388	1,588
Net income including noncontrolling interest	4,163	3,244	3,520
Less: Net income attributable to noncontrolling interest	78	51	60
Net income	$ 4,085	$ 3,193	$ 3,460

Consolidated Balance Sheets
($ millions)	2010	2009
Assets
Current Assets
Cash and cash equivalents	$ 3,377	$ 3,040
Marketable securities-current	1,101	744
Accounts receivable-net	3,615	3,250
Inventories
Finished goods	1,476	1,255
Work in process	950	815
Raw materials and supplies	729	569
Total inventories	3,155	2,639
Other current assets	967	1,122
Total current assets	12,215	10,795
Marketable securities-noncurrent	540	825
Investments	146	103
Property, plant and equipment	20,253	19,440
Less: Accumulated depreciation	(12,974)	(12,440)
Property, plant and equipment-net	7,279	7,000
Goodwill	6,820	5,832
Intangible assets-net	1,820	1,342
Prepaid pension benefits	74	78
Other assets	1,262	1,275
Total assets	$ 30,156	$ 27,250
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,269	$ 613
Accounts payable	1,662	1,453
Accrued payroll	778	680
Accrued income taxes	358	252
Other current liabilities	2,022	1,899
Total current liabilities	6,089	4,897
Long-term debt	4,183	5,097
Pension and postretirement benefits	2,013	2,227
Other liabilities	1,854	1,727
Total liabilities	14,139	13,948
Equity
3M Company shareholders' equity: Common stock, par value $.01 per share;	9	9
Additional paid-in capital	3,468	3,153
Retained earnings	25,995	23,753
Treasury stock	(10,266)	(10,397)
Accumulated other comprehensive income (loss)	(3,543)	(3,754)
Total 3M Company shareholders' equity	15,663	12,764
Noncontrolling interest	354	538
Total equity	16,017	13,302
Total liabilities and equity	$ 30,156	$ 27,250

(a) Compute net operating profit after tax (NOPAT) for 2010. Assume that the combined federal and statutory rate is: 37.0% (Round your answer to the nearest whole number.)
2010 NOPAT =4266

($ millions)

(b) Compute net operating assets (NOA) for 2010 and 2009. Treat noncurrent Investments as a nonoperating item.
2010 NOA =Answer

($ millions)
2009 NOA =Answer

($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2010. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2010 RNOA =Answer

%
2010 NOPM =16%

%
2010 NOAT =

(d) Compute net nonoperating obligations (NNO) for 2010 and 2009.
2010 NNO =Answer

($ millions)
2009 NNO =Answer

($ millions)

(e) Compute return on equity (ROE) for 2010. (Round your answers to two decimal places. Do not round until your final answer.)
2010 ROE =28.74

%

(f) What is the nonoperating return component of ROE for 2010? (Round your answers to two decimal places.)
Hint: Use your prior rounded answers to compute this answer.
2010 nonoperating return =

Answer 1

A	Operating income	5,918
	Less:
	Provision for income taxes	-1,592
	Total interest expense (163*0.37)	-60.31
	2010 NOPAT	4,266
B		2010		2009
	Total assets		$ 30,156		$ 27,250
	Less:
	Cash and cash equivalents	$ 3,377		$ 3,040
	Marketable securities-current	1,101		744
	Investments	146		103
	Marketable securities-noncurrent	540		825
	Total current liabilities	6,089		4,897
	Short-term borrowings and current portion of long-term debt	$ 1,269		$ 613
	Pension and postretirement benefits	2,013		2,227
	Other liabilities	1,854	$ -16,389	1,727	$ -14,176
	NOA		$ 13,767		$ 13,074
C	RNOA = (NOPAT / (NOA 2010 + NOA 2009) / 2)
	RNOA 2010	31.79%
	4266/((13767+13074)/2)
	NOPM = NOPAT / Net sales
	NOPM 2010 (4266/26662)	16.00%
	NOAT = (Net Sales / (NOA 2010 + NOA 2009) / 2)
	NOAT 2010 ( 26662/((13767+13074)/2))	1.99
D		2010		2009
	Short-term borrowings and current portion of long-term debt	$ 1,269		$ 613
	Long-term debt	4,183		5,097
			$ 5,452		$ 5,710
	Cash and cash equivalents	$ 3,377		$ 3,040
	Marketable securities-current	1,101		744
	Marketable securities-noncurrent	540		825
	Investments	146		103
			$ -5,164		$ -4,712
	NNO		$ 288		$ 998
E	ROE = Net income / Average shareholders' equity
	Net income	$ 4,085
	Average shareholders' equity (15663+12764)/2	14214
		28.74%
F	Nonoperating return component of ROE for 2010 = ROE – RNOA
	= 28.74%-31.79%	-3.05%